Industry has been awaiting guidance from the Internal Revenue
Service on the definition of property that will qualify as
"good REIT assets" under the Internal Revenue Code. On
May 14, 2014, the government published an important set of proposed
regulations, meant to "clarify" current law, and which
generally would be applied to existing assets as of the end of the
quarter following publication of the regulations in final form. The
proposed regulations do not address all currently pending private
ruling requests (such as those relating to file storage
facilities), but provide a foundation and approach addressing many
questions that arise in this area.
The preamble to the proposed regulations notes that guidance had
been published in the form of revenue rulings through 1975, and
thereafter in the form of private rulings, which technically, can
be relied upon only by their recipients. Thus the proposed
regulations are meant to provide general guidance to all taxpayers,
and seem consistent with an approach that may limit issuance of
future guidance in the form of private rulings.
To this end, the proposed regulations include the following as
real property: land, inherently permanent structures, structural
components, and certain intangible assets. The approach of the
proposed rules is to consider such distinct assets as real estate
only where they serve a predominantly passive (or utility-like)
function (rather than enabling the conduct of an active business).
The proposed rules also provide safe harbors for certain
"inherently permanent" assets including billboards,
transmission towers and lines, fuel storage tanks and pipelines,
Beyond the safe harbors, the proposed regulations provide a list
of factors to consider in determining whether a distinct asset will
be considered real property, and provide 13 examples to illustrate
application of those principals. Included as examples of good real
estate assets are fruit trees, rights accompanying a marina's
boat slips, a massive indoor sculpture (that would be destroyed if
moved), a cold storage warehouse, immovable space-lease partitions,
solar-power generating systems dedicated to a particular adjacent
or connected property leased to the same tenant that will use most
of the power generated, most of a pipeline transmission system,
cell tower land-use permits, and goodwill associated with the
location of a landmarked hotel. Examples of assets not to be
treated as real estate include movable bus shelters and space-lease
partitions, parts of a solar energy generating site (for general
use), meters and compressors used in connection with a pipeline,
and a casino license.
The proposed regulations would not significantly expand the types
of permissible assets REITs can hold, but would bring much needed
clarity to an increasingly important area that has been marked by
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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